clientele effect

Clientele effect

Describes the tendency of funds or investments to be followed by groups of investors who have similar preferences for a firm which follows a particular financing policy, such as the amount of leverage it uses.

Clientele Effect

A theory stating that a company's stock price increases or decreases according to changes in the company's policies. For example, if a company raises its dividend, investors are more likely to buy that company's stock, which would increase the price. Likewise, if a company has an excessive amount of debt, investors are unlikely to want to buy the stock and the price will decrease. The clientele effect stands in contrast with the capital structure irrelevance principle. See also: Material News.

clientele effect

The tendency of different securities to attract different types of investors, depending on the dividend policy of the issuer. For example, certain investors are attracted to stocks (for example, electric utility stocks) with high dividend yields while other investors, in high income-tax brackets, prefer stocks with lower dividend yields but more capital gains potential.
Case Study Following the close of security markets on September 25, 2001, Winn-Dixie Stores, Inc., announced the firm would slash its $1.02 annual dividend. The Jacksonville, Florida, supermarket chain was one of few large corporations that paid monthly dividends, a costly policy that attracted a clientele of investors who valued the regular current income. The monthly dividend of 8.5¢ per share was to be reduced to an expected 5¢ per quarter. The firm's policy had been to declare three monthly dividend payments at the beginning of each quarter. Under the new plan, only the quarterly dividend would be declared. At the time of the dividend announcement the firm also indicated first-quarter earnings would be in the range of 15¢ to 18¢ per share, a reduction from the previous projection of 24¢ to 30¢ per share. At the same time the company lowered its forecast for fiscal 2002 earnings. The announcement was bad news for stockholders, who saw the value of their shares fall in price during trading on the day following the news. Winn-Dixie common stock fell $7.37 to $12.41, a 37% decline on very heavy volume. The firm's chief financial officer said the new dividend policy would give Winn-Dixie more financial flexibility at the same time it placed added emphasis on capital appreciation rather than cash payments to stockholders. The large price decline indicated existing stockholders apparently didn't appreciate the new emphasis.
References in periodicals archive ?
The clientele effect argument suggests that investors have different preferences and characteristics such that investors select firms whose payout policies are consistent with their preferences.
A simplistic response would be to say that the directors had thrown money at shareholders to pump up the share price, being aware of the signalling effect of dividends and the clientele effect. Candidates who recognised these influences would have gained credit, but more sophisticated analysts would have seen beyond the immediate dividend and would quickly lose confidence in B if it clearly couldn't afford such pay-outs.
In addition, from the effect of each factor on the mortgage term, one can expect a clientele effect, in which home buyers in a relatively high tax bracket with high risk tolerance and many investment gain tax shields are likely to choose a long-term (30-year) mortgage in a low-rate environment; home buyers in a relatively low tax bracket with low risk tolerance and few investment gain tax shields are likely to choose a short-term (15-year) mortgage in a high-rate environment.
But the main question is whether, by observation of real data, this clientele effect can be empirically detected.
Gruber (1970), 'Marginal stockholder tax rates and the clientele effect'.
(1) One stream of this research examines post-dividend-change trading activity for evidence that the dividend clientele effect is strong enough to create shareholder clientele changes.
Included as standard material in virtually every corporate finance textbook, the ratchet effect in dividend policy is rationalized on the basis of dividend signaling (whereby dividends embody information regarding the likely path of future earnings), and also upon resistance to dividend reductions by stockholders who rely on dividends as a source of income (known as the clientele effect).
Whether due to circumstances out of the lender's direct control or to a lower-income clientele effect, VA loans average 121.4 days in delinquency as compared with 77.9 days for conventional loans.
A further study of both insurers' dividend yield opportunities provides additional evidence supporting the notion that insurers apply portfolio strategies to achieve after-tax efficiency and that the tax-induced dividend clientele effect exists among insurers.
Gruber, 1970, "Marginal Stockholder Tax Rates and the Clientele Effect," Review of Economics and Statistics 52, 68-74.
In their 1980 study, Litzenberger and Ramaswamy document evidence that seems consistent with a tax-induced clientele effect. A clientele effect exists in the economy when investors in higher (lower) tax brackets buy stocks with low (high) dividend yields.